ICO (Initial Coin Offering) was in the past one of the most popular ways to attract investment. It is carried out by selling new tokens for existing popular types of cryptocurrencies – Bitcoin, Ethereum. You can find another name for ICO – crowd-sale. It belongs to the category of collective financing. The essence of the initial offer of coins is to attract highly liquid types of cryptocurrencies in exchange for new ones that are not yet popular enough. Funding is used to further develop the project.
ICO become very popular in 2017. But since 2018, there has been a drop in attracted investments with the help of the initial coin supply. In many ways, the fault belongs to numerous scammers; investor confidence in the blockchain has seriously shaken. Also, the US Securities Commission, the main regulator for digital assets, classifies cryptocurrencies as securities. In turn, this influenced the closure of many projects. The main disadvantages of the ICO:
- legal uncertainty;
- the presence of fraudsters among the organizers;
- projects that did not meet the expectations of investors;
- activation of securities market regulators to tighten control;
- Investors’ rights are not protected by anything.
Despite the falling popularity of ICOs, the cryptocurrency market continues to attract investors. Alternatives to ICOs are emerging, each with its own merits and demerits.
IEO Initial Exchange Offer
With the beginning of the decline in the popularity of ICOs, an alternative option for attracting investments appeared – the initial exchange offers of IEO. In this case, the exchange plays a key role. It acts as a guarantor of the reliability of new projects, performing their selection. It is the exchange that is the main partner of the developer of the new token. The developer’s task is to issue tokens, list them on the exchange. In turn, the exchange is engaged in the distribution of cryptocurrency among its registered users.
The advantage of an initial exchange offering is a greater level of trust in potential investors and companies that place tokens. To purchase new tokens, you need to replenish your account and wait for the start of the token sale. Coins are purchased from the exchange, and not from the organizer of the release of new tokens.
The advantages of the method:
- exchange users – potential investors;
- the efficiency of token promotion is higher;
- an increase in the profitability of the trading platform that has placed IEO;
- the process of entering the token on the exchange is optimized, almost immediately after the completion of the token sale, the coins have liquidity.
Among the disadvantages are organizers’ costs of listing and other exchange fees. Serious requirements are put forward for the employees of the exchange platform because the failure of a startup will deal a blow to reputation.
Digital asset experts consider IEOs to be a temporary replacement for ICOs.
STO – literally translated as placement of security tokens. This is a regulated process, coordinated with the main financial authority of the country in which the issue of new tokens is taking place. In other words, STOs are tokenized shares, their owners have ownership of the assets. In other cases, the owner of the token does not have ownership.
STO is a real investment tool. The owner of tokens can count on dividends from the company’s activities, claim a part of the profit. The coins are backed by the assets of the company.
Investments are protected at the legislative level, the requirements were developed under the supervision of the SEC (US Securities Commission). In case of an unforeseen situation, the investor can count on the help of the state, file a complaint against the actions of the organizer of the token issue
- protection of legislation;
- oversight by government and official financial regulators;
- availability for serious investors;
- user confidence in the potential of a startup.
Disadvantages – high costs of maintaining tokens for the organizers of the project. Organizers and investors cannot act incognito, all information is fully disclosed, with no anonymity.
NFT – non-fungible tokens
A unique or non-fungible NFT token is another alternative to the notorious ICO. Regular tokens can be replaced or replaced with similar coins. In the case of NFT, this will not work, these are unique tokens. The technology appeared relatively recently, in 2017. It is based on the Ethereum blockchain.
The main purpose of non-fungible tokens is confirmation of ownership of assets. NFTs are most commonly used in digital painting, online games, and other subjects. Thanks to unique tokens, it became possible to prove ownership of fully digital works of art, without tangible media. The fact of converting a physical picture into digital format (work by Banksy) with the subsequent burning of the canvas is known. From that moment on, the picture is stored only in the form of a token and can be sold for cryptocurrency.
NFTs are also used to implement online games created on the blockchain platform. Musical groups release their works in the format of unique tokens. There are special platforms on the Internet where you can tokenize the work of artists, musicians, content developers.
The prospects for NFT are huge, especially in the area of copyright. A sharp increase in the capitalization of unique tokens is expected compared to 2020.
Ownership of a digital object does not mean that no one can see a painting or listen to a piece of music. They continue to be available to everyone and this is the main controversy of the NFT.
Decentralized Finance – DeFi
The main trend in the digital world since 2019 is decentralized finance or DeFi. The tasks for the new technology are large-scale – to open access to ordinary users to investment platforms, decentralized loans. In fact, DeFi is intended to replace the real banking sector, traditional financial technologies. With the help of decentralized finance, you can save on banking commissions and receive passive income from owning digital assets.
Examples of DeFi – lending protocol MakerDao, InstaDApp, Compound, BlockFi. These services allow you to borrow cryptocurrency or invest tokens at interest.